CLP

Expert report calls on government to overhaul its regulation of power suppliers, branding it unfair to consumers and lacking transparency

The Hong Kong government should break up the dominance of electricity suppliers CLP Power and Hongkong Electric and revamp its regulatory framework, which is “unfair” to consumers, a study has concluded.

The Consumer Council report also calls for the development of renewable energy, the importation of electricity and more nuclear power from Guangdong, and greater use of natural gas to meet the government’s goal of supplying reliable, safe, sustainable and affordable energy.

Compiled over 18 months by three overseas experts, the study effectively sets the agenda for a public consultation next year on the post-2018 regulatory road map and the mix of fuels in the city’s electricity market.

“The goals are conflicting,” said Consumer Council chief executive Gilly Wong Fung-han. “But the reform can be done step by step.”

The 170-page report comes as CLP and Hongkong Electric prepare to reveal next year’s planned tariffs. CLP is reported to be considering a rise of 5 to 6 per cent, while Hongkong Electric may retain current charges.

For over a century, CLP has served households in Kowloon, the New Territories and Lantau, while Hongkong Electric provides power on Hong Kong Island and Lamma.

The council said the scheme of control agreements which allows CLP and Hongkong Electric to tie their earnings with investments in power assets and requires them to meet certain emission reduction obligations, was unfair to consumers.

It criticised the existing regulatory mechanism for allowing power firms to pass business risks on to consumers and lacking transparency.

The scheme of control agreements permits CLP and Hongkong Electric to earn a 9.99 per cent return annually on their average net fixed assets in use in the 10 years to 2018 – cut from 13.5-15 per cent before 2008. The scheme has triggered controversy in recent years, with the government under public pressure for a review to avoid a monopoly.

The Environment Bureau said next year’s public consultation would consider public expectations on having the power companies make returns that are commensurate with business risks in the power market.

CLP said it was “open-minded” on any future talks on market reform, but warned that “any effective discussions should be based on clear objectives, and future development should be based on a thorough understanding of the subject matter and relevant issues”.

Hongkong Electric declined to comment until it had read the council’s study.

Citigroup analyst Pierre Lau said the renewal of the scheme of control agreements with “high returns” could be politically sensitive and he did not expect any renewal to happen before the chief executive election in 2017.

The Consumer Council said the Hong Kong government should create competition in power generation by encouraging investors to invest in small-scale, gas-fired electricity generators in a commercial or a residential district to feed local needs.

Any excess supply could be sold to CLP or Hongkong Electric.

However, this would be viable only if the pair were willing to allow third parties access to their power grids.

“We believe this regulator needs to have a critical mass in order to match the resources of the two electricity companies,” Cheng said.

“The regulatory system must also be improved to allow greater public participation and a more direct reflection of consumer interests.”

The council report, released yesterday, sets the stage for debate next year when the government is due to gauge public views on how to reform the post-2018 regulatory regime of the city’s electricity market.

A 10-year contractual agreement, known as a scheme of control, lays down rules governing operations, from tariffs to development, of the two power suppliers, CLP Power and HK Electric. The agreement expires in 2018.

The report criticised the scheme as being unfair to consumers as the duopoly was allowed to earn high risk-free profits while passing on business risks to users to an “undue degree”.

At issue was how to protect low-income users, such as subdivided-flat dwellers, from “fuel poverty” – the state of being priced out by rising power bills.

Robin Simpson, a contributor to the report, noted an “in-built tension between environmental policy … which envisages people paying a cost recovery price for energy”. He raised the question “of how consumers, particularly the broader consumers, can afford to pay [these] higher prices”.

An Environment Bureau spokesman said the scheme had been improved over the years to “incrementally improve its operation, promote transparency and ensure consumers’ interests are addressed”.

CLP Power and Hongkong Electric have been operating like a duopoly for years, unfairly overburdening consumers with price rises while being allowed to earn risk-free profits, the Consumer Council said.

The consumer watchdog said the existing method of regulation through the Scheme of Control Agreements, which expire in 2018, needs to be reformed.

It also proposed an energy commission that may meet the future challenge of a reform policy.

In its 170-page report released yesterday, the council said the existing regulations will not be flexible enough to adapt to the new environmental policy supporting emission reduction over the next 30 years.

Chief trade practices officer Victor Hung Tin-yau said under the current scheme, “the two power companies are allowed to earn a high risk-free profit while passing on business risks to consumers to an undue degree.” The scheme has “low transparency and lack the engagement of consumers.”

Competition policy committee head Thomas Cheng Kin-hon said reform should take place “incrementally” to ensure the merits of the existing system and meet new objectives.

The study was undertaken with the advice of an expert international group formed to look into the experience of electricity regulatory reform in the mainland, Britain, Australia, Germany and France.

Cheng said liberalizing the retail electricity market “presents no sound solution” since overseas experience has found that it spurs residential users to face higher bills and commercial users to pay less than before.

The report also suggests using diversified energy resources such as power station fuel, natural gas, renewables, nuclear and biomass, which can reduce emissions of greenhouse gas.

As to the cost-effectiveness of having renewables, one of the experts, Stephen Thomas a professor of energy policy and director of research in the Business School of the University of Greenwich in London said it depends on local resources.

“For example, Britain is windy, so wind power is more cost effective. Similarly since Britain is not a sunny country, solar power will be more expensive, so it has to look at the local condition and local resources,” he said. “Hong Kong has its own resources some are good and some are not so good.”

City supplier teams up with mainland giant to grab Exxon Mobil’s stake in three electricity plants Hong Kong’s biggest electricity provider, CLP Power, and state-owned China Southern Power Grid (CSG), will each pay HK$12 billion to acquire Exxon Mobil’s 60 per cent stake in Castle Peak Power Company (Capco).

The deal strengthens CLP’s presence in Hong Kong and brings a mainland player into the city’s closed electricity market for the first time. It is not expected to affect tariffs as it involves only shares, without adding fixed assets. But analysts said a strengthened partnership between the largest power suppliers in Hong Kong and southern China could help CLP meet a new 2020 emissions target that may require more clean energy to be imported from the mainland.

After the transaction, CLP’s stake in Capco – which owns three power plants in Hong Kong – will jump from 40 per cent to 70 per cent. CSG will hold the remaining 30 per cent.

CLP vice-chairwoman Betty Yuen So Siu-mai said it was a natural commercial decision to bring CSG into talks that started more than a year ago when Exxon Mobil, the world’s biggest independent oil company, expressed a desire to exit the market.”All electricity imported into Hong Kong must pass through the CSG network,” Yuen said. “Our partnership with CSG will make any transmission of cleaner energy from the mainland easier.” Pierre Lau, managing director and head of Asian utilities research at Citigroup, said the closer ties might also cushion CLP from competition if regulators open up the city’s electricity market.

“Any power supplier who wants to enter Hong Kong must first get past CSG. Of course, it would give CLP an edge if it has a good relationship with CSG,” he said. CLP will also buy out Exxon Mobil’s 51 per cent stake in Hong Kong Pumped Storage Development for HK$2 billion in cash. The whole deal will remove Exxon Mobil from the city’s commercial power generation market – its only such investment worldwide. An Exxon Mobil spokeswoman said it planned to explore other opportunities. Citigroup expects the deals will raise CLP’s net profit by up to 3 per cent next year and 5 per cent in 2015 if the deals are finalised by the middle of next year. CLP said it had secured a HK$10 billion loan facility from HSBC to fund the deal, but in the long run it may have to refinance the loans through corporate bonds or perpetual securities.

Power suppliers CLP and Hongkong Electric will continue to enjoy the 9.99 percent permitted return on capital investment.

The decision – following a just- completed mid-term review of the Scheme of Control Agreements between the government and power companies – was expected, said an Energy Advisory Committee member.

During the review, the two firms agreed to set up an energy efficiency fund from shareholders’ earnings to provide subsidies on a matching basis to owners of non- commercial buildings so they can make their structures more energy efficient.

The scheme is expected to be launched in the first half of next year.

According to previous records, the two companies are expected to invest HK$100 million into the fund, with HK$70 million coming from CLP and spread over four years.

CLP and Hongkong Electric also agreed to raise performance thresholds for both incentive payments and penalties with regard to supply reliability, operational efficiency and customer services.

They also reached a consensus on lowering the cap on the Tariff Stabilisation Fund balance, from 8 percent to 5 percent of annual total revenues from sales of electricity to local consumers, to ensure the balance of the fund can be used to alleviate the impact of tariff increases on customers.

To promote transparency, both firms will set up dedicated websites to show information relating to financial and operating data. The current Scheme of Control Agreements run for a term of 10 years and will expire in 2018.

Energy Advisory Committee member William Yu Yuen-ping said the energy efficiency fund is a breakthrough to help buildings save power.

“Since the fund is from shareholders’ earnings, it will not be included in operational costs and should not affect tariffs,” he said.

An Environment Bureau spokesman said electricity consumers can expect some benefits from the modifications.

Conservation group World Green Organization predicted CLP will increase electricity charges by 4 to 5 percent and Hongkong Electric by up to 1 percent.

A proposed offshore wind farm off Sai Kung might not see its blades rotating for at least another two years after the city’s largest power producer decided to extend a feasibility study into its economic viability and technical design.

The wind farm, proposed by CLP Power for construction near the Ninepin islands, was once said to be the city’s most ambitious renewable energy project and was targeted for completion by 2016. But the firm now appears to be taking a more cautious approach to the project.

Offshore wind farms in Hong Kong can hardly be described as feasible (HK Magazine)

Richard Lancaster, chief executive of CLP Holdings, the firm’s parent company, said the group had already spent 10 years looking into how to build a wind farm in Hong Kong, but it did not want to make a hasty decision.

“The decision has to be taken quite carefully as it is a big investment. We need to make sure the costs are fully understood,” he said at the World Energy Congress in South Korea last week.

Lancaster said more solid wind data would be required to confirm the project’s economic feasibility, and that a couple more years of study were needed.

The lengthening of the study means the multibillion-dollar project is unlikely to be part of the five-year development plan the company submitted to the government earlier this year.

Construction of the infrastructure for the wind farm would boost the value of the firm’s fixed assets, which is the basis on which its maximum permitted profits by the government are calculated. The greater the asset value, the higher the return allowed.

The firm is facing uncertainty ahead of the expiration of the current regulatory regime for the power industry, also known as the Scheme of Control Agreement, in 2018. A decision will likely be made before 2016 on whether the electricity market will be liberalised.

CLP estimated in 2011 that a 200 megawatt wind farm with up to 67 turbines would cost up to HK$7 billion and would lead to a 2 per cent rise in customer tariffs.

Lancaster said he would prefer the wind farm, if it were accepted, be paid for by all the company’s electricity users.

Hong Kong’s energy policymakers like CLP chief Richard Lancaster defends their continued reliance on unsustainable energy, going about different ‘mixes’ of such sources as coal, nuclear and natural gas to make it seem like they have done much thinking through ‘consultations’.

Chief of largest power firm says consumers will be told implications of each mix of sources

Hong Kong’s energy future will rely on an “open and transparent” public consultation that will tell people the implications of their choices in favouring a particular energy mix, says the chief of the city’s largest power firm.

Richard Lancaster, chief executive officer of CLP Holdings, said all relevant information, from energy security and environmental performance to costs, would be made available.

“All implications should be made as open and transparent as possible so that the community has all the information needed to make a judgment,” he said at the World Energy Congress in Daegu, South Korea, last week.

Environment Secretary Wong Kam-sing, also speaking last week, said the consultation aimed to find out the most acceptable energy mix in terms of the proportion of coal, gas, renewable and nuclear in electricity generation by the power firms.

Any decision on the future mix will have significant bearing not just on cost, but also the environment and reliability.

While the mix was a matter for policymakers, Lancaster said it should be “flexible” enough to meet challenges, including the volatility of international fuel prices. “It is important we don’t lose our flexibility and close all options,” he said.

In 2010, the Environment Bureau consulted on a climate-change strategy that proposed a plan for half of electricity demand to be met by nuclear fuel, 40 per cent by gas and 10 per cent by coal by 2020. But it decided to reconsider it last year after the 2011Fukushima nuclear disaster. The mix is now 54 per cent coal, 23 per cent from nuclear and 23 per cent from natural gas.

Lancaster said to ensure supply diversity, he opposed closing all coal-fired plants. “Coal is something we can reduce. But to go to the extreme of closing down coal-fired plants, it would be a bad thing for us,” he said.

Lancaster also wanted to diversify local gas supply by building a liquefied natural gas terminal in eastern Shenzhen which could bring in cheaper gas from around the world when international prices dropped.

On nuclear energy imports, Lancaster acknowledged there were “genuine concerns” that needed to be addressed. But he said one way of tackling these concerns was to have a Hong Kong firm involved in developing mainland nuclear stations.

“We have higher transparency, modern Hong Kong management style, Hong Kong standards of governance to apply for nuclear power stations,” he said.

Christine Loh Kung-wai, the environment undersecretary who also attended the congress, said that while “some people” in society hated nuclear, she had heard of no one who wanted to completely drop imports from the Daya Bay nuclear station.

“Instead of just telling us nuclear should not be allowed, there needs to be an objective discussion on how we look at coal and gas,” she said.

Loh, however, said it would be difficult for the government to tell the public exactly what future prices would be for different fuel mixes as even the most authoritative agency in the United Nations could only provide a loose range of prices.

One of the effects of Typhoon Usagi, which received little attention, was its impact on the Honghaiwan wind farm in Shanwei, eastern Guangdong, about 130 kilometres northeast of Hong Kong. The onshore wind farm comprises 25 imported Vestas V47 600KW turbines. The website Windpower Intelligence reports that eight of the turbines were blown down by the typhoon, while the blades of another eight turbines were blown off, and the blades of the remaining turbines are being examined to see if they can operate normally.

CCTV2 reported that 70 per cent of the wind farm had been knocked out. Windpower Intelligence reports that one of the managers says the typhoon has led to 100 million yuan in losses for the wind farm. This is the second time the wind farm has suffered typhoon damage. The farm was hit in 2003 with damage to 13 out of 25 turbines, causing losses of 10 million yuan.

The recent damage may have caused some unease within the government and possibly within Hongkong Electric and CLP, the two companies planning wind farms in Hong Kong waters. CLP, Hong Kong’s largest power company, plans to build what will be one of the biggest offshore wind farms in the world off Sai Kung – generating 200 megawatts a year – at a cost of almost HK$7 billion. Hongkong Electric is to build a HK$3 billion wind farm between Lamma Island and Cheung Chau that would generate 100MW of power – enough for 50,000 households.

Since Shanwei is fairly close to Hong Kong, it is frequently used as a reference for winds in Hong Kong. “This is another indication of how ill-advised these Hong Kong wind projects are,” Ng Young, the chairman of Hong Kong’s Association for Geoconservation, told Lai See.

The companies are still involved in testing work, and construction has yet to begin. At best the two wind farms might produce about 1.5 per cent of Hong Kong’s total electricity production, and reduce its output of carbon dioxide by about 2 per cent. This miniscule contribution comes at a cost of HK$10 billion. Regardless of how useless these wind farms are, the government can point to them as its contribution to reducing Hong Kong’s carbon footprint and take its place in the world’s effort to limit the production of carbon dioxide, and thereby global warming, or so they would have us believe. As for the power companies, the farms are a wonderful opportunity for them to increase their net assets at a time when returns from the scheme of control, which governs them, have been reduced from 13.5 per cent to 15 per cent under the previous scheme, which ended in 2009, to 9.99 per cent under the current scheme. But they will get 11 per cent on their wind farm assets since they are a form of renewable energy. Meanwhile, the public picks up the bill in the form of higher electricity prices. Higher fuel costs are inevitable, but better to spend this on efficient clean energy like gas.

Ng says the wind farms are unsightly and kill birds, and are an unreliable source of energy. He makes the point that the Shanwei wind farm operates at an average of 17 per cent to 18 per cent efficiency: “The government is silly to support this project – building this white elephant just for the sake of appearing to do something green, when in fact it is damaging the environment, and costing the community a lot of money in terms of higher fuel bills and higher costs to business. The only beneficiaries are the power companies.”

OTTAWA — The high-tech impresario behind Plasco Energy Group won’t say whether he thinks the company can meet an Aug. 31 deadline set by the city for proving it has the financing to build a major garbage-disposal facility in Ottawa.But Rod Bryden does say he definitely won’t be meeting a deadline a month earlier the city wants to set so councillors can make an informed decision about killing the contract the City of Ottawa has with Bryden’s company.

“I don’t want to engage in providing information about financing prior to the time I provide it to the city,” Rod Bryden said Monday. The city announced Friday it sent the Plasco chief executive a letter giving the company 60 days to show it has the necessary financing in place. The company must also show it has signed at least $5 million worth of contracts for construction of the facility, a condition built into Plasco’s December 2011 deal with the city for disposal of up to 150,000 tonnes a year of residential garbage. The deadline in the contract is Aug. 31. But the letter from Kent Kirkpatrick says city council wants to make a decision on whether to end the contract at a meeting a few days earlier, Aug. 28. Its environment committee meets to give a recommendation on what to do Aug. 22. City rules say an agenda for that meeting has to be published Aug. 15.

“In order to ensure that the report is available for release on this date, Plasco must provide the necessary documentation to the City for verification on or before July 31, 2013,” the letter says.

No, Bryden said in an interview. He expects to give the city and councillors the information they demand by Aug. 21, before the environment committee meets. Beyond that, all Bryden would say about finding the money and letting contracts is “it’s going fine.”

Plasco proposes to use “plasma gasification” technology to dispose of waste, cracking garbage apart at the molecular level via extremely high temperatures and turning the trash into a burnable gas, with a small amount of inert glassy slag let over. The city would pay $83.25 per tonne of waste disposed; that’s double the operating costs at the city’s Trail Road landfill, but would put off an expense of hundreds of millions of dollars to open a new landfill when that facility is full.

That’s if Plasco’s process works, and if investors and lenders are willing to fund it. The contractual clause activated by the city’s letter is meant to kill the project if Plasco can’t get it off the ground. The company has already had the deadline extended once; Kirkpatrick’s letter says that if Plasco wants another one, it’ll have to give city officials a comprehensive presentation on why — also by the end of July.

The entrepreneur and former owner of the Ottawa Senators has said repeatedly in the past that Plasco was close to achieving important milestones which proved to take months. But other work is proceeding, he said. “We are fully into all the work you need to do to deliver this Ottawa project. There are studies underway as to air quality, there are studies, I think completed, as to the hydrology under the site,” he said. (The property to be used for the plant, close to the landfill, belongs to the city and as a landlord it wants assurances the plant can operating without fouling its surroundings.)

One major stumbling block in the past has been getting a deal with the provincial government to sell electricity the plant generates to the grid. Bryden said Plasco doesn’t have a signed deal with the Ontario Power Authority for that but does have a set of clear conditions to meet.

“The OPA typically doesn’t enter into a contract until the plant they are entering into a contract with is operational,” Bryden said.

A test facility, also near Trail Road, has been closed for months for upgrades after running trials meant to satisfy investors that Plasco’s waste-to-energy process really works. It is expected to resume operating by the end of July, Bryden said.

Thank you for your email to Mr Lancaster. We appreciate your interest in the energy subject which is important issue to all people in Hong Kong.

CLP is supportive to development of renewable energy (RE) projects while we put the highest priority to safety and technical compliance in our operations. For customers who wish to install their own RE facilities, we provide technical support to help them fulfill specified technical and safety requirements set by Electrical and Mechanical Services Department. Currently most of these projects are in small scale, and their connection to power grid is to ensure stable backup power supply purpose.

We also assess and discuss commercial, technical and operational impact for larger scale RE facilities, like the Government’s waste-to-energy projects, to connect to our grid. Meanwhile, CLP is still in discussion with the Government on such connection, and detail is not available yet.

We appreciate views from stakeholders. Should you have any opinion on energy issues, you are most welcome to share with us.